904 F.

2d 1456

COLORADO INTERSTATE GAS COMPANY, Petitioner,

v.
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent,
The Gates Rubber Company; Questar Pipeline Company; K N
Energy, Inc.; City of Colorado Springs; Natural
Gas Pipeline Company of America, Intervenors.
No. 88-1932.

United States Court of Appeals,

Tenth Circuit.
May 31, 1990.

William W. Brackett (Rebecca N. Noecker, Vice President and Asst. Gen.

Counsel, Colorado Interstate Gas Co., Colorado Springs, Colo.; Daniel F.
Collins, Sr. Vice President, Donald C. Shepler, Gen. Atty., and Kathrine
L. Henry, Sr. Atty., Colorado Interstate Gas Co., Washington, D.C., with
him on the briefs), Washington, D.C., for petitioner.
Robert H. Solomon, Atty. (Catherine C. Cook, Gen. Counsel, and Jerome
M. Feit, Sol., with him on the briefs), Federal Energy Regulatory Com'n,
Washington, D.C., for respondent.
Paul Korman (Paul W. Mallory, Paul E. Goldstein, and Joseph M. Wells,
Lombard, Ill.; and J. Curtis Moffatt of Gardner, Carton & Douglas,
Washington, D.C., with him on the briefs) Washington, D.C., for
intervenor.
Before LOGAN and BRORBY, Circuit Judges, and BRATTON, * District
Judge.
BRORBY, Circuit Judge.

Petitioner Colorado Interstate Gas Co. (CIG) appeals two final administrative
orders of the Federal Energy Regulatory Commission (FERC, or Commission)

relating to the rates CIG may charge for the sale and transportation of natural
gas. Specifically, CIG asserts FERC erred in ordering the elimination of the
fixed-cost minimum commodity bill provision in CIG's service agreement with
Natural Gas Pipeline Co. of America (NGPL) and in rejecting CIG's proposed
transportation rate for "on-system" service.1 We affirm the challenged portions
of the FERC orders.
2

This proceeding originated when CIG, an interstate natural gas pipeline

company subject to the Natural Gas Act, 15 U.S.C. Secs. 717-717w, filed with
FERC a rate increase request under section 4 of the Act, 15 U.S.C. Sec. 717c.
FERC ordered a hearing on the lawfulness of the proposed rates, which was
conducted by a FERC administrative law judge (ALJ). The Commission
subsequently affirmed in substantial part the ALJ's initial decision in Opinion
No. 290, Colorado Interstate Gas Co., 41 FERC p 61,179 (1987), and then
denied rehearing in Opinion No. 290-A, Colorado Interstate Gas Co., 43 FERC
p 61,089 (1988). At issue in this appeal are FERC's holdings that the fixed-cost
minimum commodity bill in CIG's service agreement with NGPL was
anticompetitive and must be eliminated and that CIG's proposed on-system
transportation rate is unjust and unreasonable.2

Under CIG's contract with NGPL, NGPL is entitled to buy a specified quantity
of natural gas (currently 47 billion cubic feet (Bcf) per year) from CIG, and
CIG must stand ready to deliver that quantity. The first issue in dispute is the
contract's minimum bill provision, which requires NGPL to pay the commodity
costs associated with ninety percent of its annual entitlement, even if it takes
delivery of no gas from CIG.3 CIG recovers from NGPL approximately $15
million annually in production and gathering costs via the minimum bill and $9
million annually collected through a demand charge. FERC ruled that the
minimum bill is anticompetitive, and thus unjust and unreasonable, and ordered
that it be eliminated. This would limit to the demand charge alone CIG's
guaranteed recovery from NGPL of fixed costs incurred on NGPL's behalf.
FERC also ruled that CIG failed to bear its burden of proving the justness and
reasonableness of its proposed rate increase for on-system transportation. The
agency accordingly rejected CIG's request and ordered refunds for the period
the proposed rate had been in effect.

We review these decisions pursuant to 15 U.S.C. Sec. 717r. The factual

findings of FERC, if supported by substantial evidence, are conclusive. Section
717r(b); Colorado Interstate Gas Co. v. FERC, 791 F.2d 803, 807 (10th
Cir.1986), cert. denied, 479 U.S. 1043, 107 S.Ct. 907, 93 L.Ed.2d 857 (1987)
(CIG I ). Moreover, under the Administrative Procedure Act, a court can set
aside an agency action only if it is "arbitrary, capricious, an abuse of discretion,

or otherwise not in accordance with law." 5 U.S.C. Sec. 706(2)(A); cf. In re

Permian Basin Area Rate Cases, 390 U.S. 747, 790, 88 S.Ct. 1344, 1372, 20
L.Ed.2d 312 (1968) (FERC's orders "may not be overturned if they produce 'no
arbitrary result' "). The "substantial evidence" test has been equated with the
"arbitrary and capricious" standard of review. East Tenn. Natural Gas Co. v.
FERC, 863 F.2d 932, 937 (D.C.Cir.1988) (East Tennessee ) (quoting Maryland
People's Counsel v. FERC, 761 F.2d 768, 774 (D.C.Cir.1985)).
5

The burden of proving that a rate change is "just and reasonable," 15 U.S.C.
Secs. 717c-717d, is on the party proposing the change. CIG I, 791 F.2d at 806;
East Tennessee, 863 F.2d at 937. When FERC initiates review of an existing
rate structure, it bears the burden of proving that the existing rates are unjust
and unreasonable and that those it orders in replacement are just and
reasonable. 15 U.S.C. Sec. 717d(a); East Tennessee, 863 F.2d at 937. Once it
makes these prima facie showings, the burden shifts to the opposing party to
rebut them. E.g., Transwestern Pipeline Co. v. FERC, 820 F.2d 733, 746 (5th
Cir.1987), cert. denied 484 U.S. 1005, 108 S.Ct. 696, 98 L.Ed.2d 648 (1988).

We find it unnecessary to detail much of the background of this case--the

purposes of the Natural Gas Act, the procedural history of this action, and the
nature and workings of CIG's rate structure and the elements thereof--as these
exercises have been performed adequately by this court or others on various
occasions. See, e.g., CIG I, 791 F.2d at 805 (describing the early procedural
history of this case and CIG's minimum bill provision); Associated Gas
Distributors v. FERC, 824 F.2d 981, 995-96 (D.C.Cir.1987), cert. denied 485
U.S. 1006, 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988) (describing purposes of the
Act and the evolving regulatory climate); Wisconsin Gas Co. v. FERC, 770
F.2d 1144, 1149-53 (D.C.Cir.1985), cert. denied, 476 U.S. 1114, 106 S.Ct.
1968, 90 L.Ed.2d 653 (1986) (discussing the operation of minimum bills
generally, how FERC policy with respect to minimum bills has evolved in
response to changes in the gas industry, and FERC's statutory authority);
Mississippi River Transmission Corp. v. FERC, 759 F.2d 945, 947-50
(D.C.1985) (discussing minimum bills). Thus we proceed with our discussion
of the issues.

I. The Minimum Bill

7

CIG claims that minimum bills are just and reasonable generally and in this
case specifically. It argues that its minimum bill does not have anticompetitive
effects and is necessary to prevent NGPL from shifting its cost responsibility to
CIG or to CIG's other customers. Finally, CIG claims that, even if the
minimum bill is anticompetitive, it meets each of the three tests for retaining a

minimum bill established in In re Atlantic Seaboard Corp., 38 FPC 91 (1967),

aff'd, Atlantic Seaboard Corp. v. Federal Power Comm'n, 404 F.2d 1268
(D.C.Cir.1968).4
8

CIG made preliminary arguments concerning the minimum bill that will not be
discussed in detail here as we find them without merit. Briefly, CIG claims that
minimum bills have been found just and reasonable in other proceedings and
that CIG's own minimum bill was upheld as reasonable in a prior action.
Colorado Interstate Gas. Co., 27 FERC p 61,315 (1984), aff'd, 791 F.2d 803
(10th Cir.1986), cert. denied, 479 U.S. 1043, 107 S.Ct. 907, 93 L.Ed.2d 857
(1987) (CIG I ). Thus, it argues, the Commission's action here is inconsistent
with FERC precedents.

We are persuaded, however, by FERC's counterarguments. It makes clear that

the action challenged here accords with FERC's "increasingly less tolerant"
treatment of minimum bills in recent years. This attitude, largely a result of
changes in the gas industry, is reflected in FERC Opinion No. 380 (which
eliminated variable-costs minimum bills) and subsequent rulemaking decisions.
See Texas Eastern Transmission Corp. v. FERC, 893 F.2d 767 (5th Cir.1990)
(citing cases finding minimum bills unjust and unreasonable). Neither Opinion
No. 380 nor the Commission's ruling in the prior CIG rate case is inconsistent
with FERC's ruling in the instant action. FERC expressly reserved judgment in
Opinion No. 380 on the question of fixed-cost minimum bills. In CIG I the
agency expressed concern about allowing CIG full recovery of its fixed costs; it
directed its staff to "consider the proper level of fixed cost recovery" in the next
CIG rate case. The "next" case is this case, and FERC's decision here that the
proper level of recovery of fixed costs is no recovery (i.e., no minimum bill)
thus accords with its earlier rulings.

10

Moreover, slavish adherence to precedent by an administrative agency would

prohibit innovation and adjustment to changing conditions. Obviously, when
Congress establishes a regulatory commission the expectation is for the agency
to adapt to changing circumstances. This, simply, is what FERC has done here.

11

Having disposed of CIG's preliminary arguments, we proceed to its two

principal assertions: that its minimum bill is not anticompetitive and that, even
if it is, it satisfies the traditional criteria for retaining a minimum bill.

12

FERC acknowledges that it and NGPL carried the initial burden of proof with
respect to the minimum bill because CIG had proposed no change in this
feature of its rate structure. Although FERC's discussion of its reasons for

finding the minimum bill anticompetitive was rather meager, the agency was
entitled to rely on the presumption of anticompetitiveness established in
Transcontinental Gas Pipe Line Corp., 40 FERC p 61,188, at 61,589-90 (1987)
(Opinion No. 260-A). An agency may rely on its general policy as established
in an earlier proceeding for the required prima facie showing. See Kansas Gas
& Elec. Co. v. FERC, 758 F.2d 713, 719-20 (D.C.Cir.1985) (upholding FERC's
order barring the application of a particular rate provision, based on FERC's
previously formed conclusion that the provision tends to be unjust and
unreasonable, unless the pipeline makes specific showings).5
13

In Transcontinental Gas Pipe Line Corp., FERC decided that "a traditional
fixed cost minimum bill usually restrains competition and is presumptively
unjust and unreasonable." 40 FERC p 61,188, at 61,590 (1987) (Opinion No.
260-A). Accordingly, FERC established the "policy that in the future a pipeline
must carry the burden of producing evidence to justify retention of its fixed cost
minimum bill." Id. at 61,590. In its brief in this case, FERC also recites the
proceedings and cases that have upheld the conclusion that full-cost minimum
commodity bills are anticompetitive, asserting there is "no reason to assume
that the ... conclusion[s] would have been any different" in those cases had the
issue been fixed cost minimum bills instead."6

14

In the proceeding below, at least ostensibly, FERC relied not so much on the
established presumption as on arguments made by NGPL. NGPL claimed that
the minimum bill was anticompetitive because "alternate supply sources must
be priced lower than CIG's commodity rate by at least the amount of the
minimum commodity bill before the two purchases are equally attractive to
[NGPL]." Opinion No. 290, at 61,465 (quoting Exhibit 140 at 10-11). FERC
found this "sound theory." Id. The agency also considered it significant that
CIG admitted it was in a "gas over supply situation." Id. FERC held these
circumstances sufficient to demonstrate the minimum bill's anticompetitiveness
and to shift the burden to CIG. Opinion No. 290, at 61,465 (citing Transwestern
Pipeline Co., 36 FERC p 61,175, at 61,589 (1987)).7 We agree.

15

CIG's first principal line of argument offered in rebuttal is that minimum bills
are just and reasonable generally and in this case specifically. CIG states that,
while it remains obligated to stand ready to supply NGPL's full contract
entitlement, NGPL has been buying little or no gas from CIG.8 CIG argues that
NGPL's minimum bill does not have anticompetitive effects, pointing to the fact
that NGPL has purchased gas from other pipeline companies, at prices higher
than the CIG contract price, instead of taking gas under its contract with CIG.
CIG concludes this evidence refutes any assertion that NGPL was "forced to
forego cheaper gas supplies in order to buy CIG's gas."

16

17

CIG further alleges the minimum bill is necessary to prevent NGPL from
shifting NGPL's cost responsibility to CIG or to CIG's other customers.9 CIG
asserts NGPL should not be allowed to avoid paying the fixed costs incurred by
CIG as a result of fulfilling its contract obligation to NGPL. This is especially
true, CIG claims, because NGPL did not take full advantage of an opportunity
in 1984 to reduce its entitlement volume (i.e., renominate) to a level more
closely approximating its projected purchases from CIG.
FERC calls "unsubstantiated" the claim that NGPL has been purchasing
increasing amounts of gas from other suppliers at higher prices. However, a
witness for NGPL testified on cross-examination that during the period May
1985 to September or October 1985 NGPL had purchased 200-250 Bcf of gas
at prices exceeding the CIG contract price. This volume was 2.5-3 times
NGPL's entitlement from CIG at the time. FERC counters:

18 if [CIG's] unsubstantiated claim as to [NGPL's] purchasing practices is

Even
accurate, it does nothing to answer the obvious fact that absent the minimum bill,
[NGPL] might have purchased additional gas supplies from suppliers other than CIG
or that it might have sought a different mix of services from its pipeline suppliers.
19

Pressing this argument, FERC claimed that the price actually paid by NGPL "is
not, of course, dispositive of this question," citing for support Wisconsin Gas
Co. v. FERC, 770 F.2d 1144 (D.C.Cir.1985), cert. denied, 476 U.S. 1114, 106
S.Ct. 1968, 90 L.Ed.2d 653 (1986). Wisconsin Gas held that the appropriate
inquiry in assessing a minimum bill's effect on competition is "not whether a
particular pipeline will pursue a least-cost purchasing strategy, but is instead
whether the customer will have the ability to do so." 770 F.2d at 1159. The
Wisconsin Gas court noted that, even if some gas customers did not pursue a
least-cost strategy, FERC's evidence showed that many would; hence,
"elimination of minimum bills can reasonably be expected to lower gas costs
and spur competition among pipelines." Id.10

20

FERC also finds two flaws in CIG's renomination argument. First, it faults CIG
for presuming NGPL was able to predict accurately its future gas purchases
from CIG. Second, it asserts that renominating a zero or near-zero entitlement
(as CIG suggests NGPL should have done) would have foreclosed NGPL from
purchasing gas from CIG, one of its largest historical suppliers. FERC
concludes the opportunity to renominate did not "negate the obvious
anticompetitive effect" of the minimum bill.

21

We admit to being somewhat puzzled by NGPL's purchasing practices and

sympathetic to the argument that the minimum bill is not discouraging NGPL

from purchasing gas from suppliers other than CIG. But testimony by NGPL
suggests other factors besides price motivate a gas company's choice of
supplier. 11 We will not speculate as to the motives behind NGPL's purchasing
decisions. Considering all of CIG's arguments, we do not find substantial
evidence to rebut FERC's reasonable showing of the anticompetitiveness of
minimum bills, including CIG's.
22

CIG's second principal line of argument is that, even if its minimum bill
provision is anticompetitive, it nevertheless merits retention because it meets all
of the so-called Seaboard factors, the satisfaction of only one of which is
sufficient to justify retaining a minimum bill.12 Panhandle Eastern Pipeline Co.
v. FERC, 881 F.2d 1101, 1113 (D.C.Cir.1989). FERC rejected CIG's
arguments, however, finding the minimum bill satisfied none of the Seaboard
criteria.

A. Protecting the pipeline against the risk of nonrecovery of fixed costs.

23
24

With respect to the first Seaboard factor, CIG argues that the "minimum bill is
necessary to assure that parties [i.e., NGPL] who caused CIG to incur fixed
costs bear the costs which they have caused." The minimum bill is needed
because NGPL is no longer buying gas from CIG; thus, it is no longer paying
those fixed charges included in the sales commodity rate. CIG's brief is
somewhat ambiguous on this point, but it appears the costs that CIG claims
would be unrecoverable from NGPL without a minimum bill are fixed
production and gathering costs, the return on equity and associated income
taxes, and carrying charges associated with take-or-pay expenditures allocated
to NGPL.

25

FERC's simple answer to this argument is that the recovery of these costs
should not be guaranteed.13 FERC agrees that the above costs itemized by CIG
are not included in the demand charge, but in the commodity charge;
accordingly NGPL pays them only when it buys gas. But FERC has decided
that these costs should be at risk. Transcontinental Gas, 40 FERC p 61,188, at
61,590. This is "sound Commission policy" because it serves as "an incentive
to the pipeline to minimize these costs and to make prudent expenditures," and
because CIG "should not be guaranteed a profit."

26

We find the D.C. Circuit's reasoning in East Tennessee helpful in disposing of

this issue. In a similar fact situation the D.C. Circuit held that FERC's policy
judgment--that placing at risk certain production costs (such as return on
equity) would encourage the pipeline company to increase its competitiveness-was a judgment "well within [FERC's] discretion in deciding what is a just and

reasonable rate." 863 F.2d at 939. The court further concluded that this policy
judgment constituted substantial evidence for rejecting the first Seaboard
justification for retaining the minimum bill.14
27

In assessing the reasonableness of FERC's judgment that certain costs should be

at risk, the East Tennessee court noted the pipeline company presented no
testimony that it would "not be able to compete for sales effectively" absent a
minimum bill. 863 F.2d at 940. It is not clear from the opinion, however, what
weight the court would have accorded such evidence had it been offered. Here,
CIG makes such an argument in its reply brief. According to CIG, FERC's
suggestion that NGPL's minimum bill volume "can readily be 'made up' " by
selling gas to other customers is "wholly unrealistic" and "ignores stark market
reality." CIG does not cite to evidence in the record that would support this
contention, however, and we have found none.15 CIG also has stated that "its
ability to recapture the lost [NGPL] sales is not supported by the record."
Opinion No. 290-A, at 61,278. FERC stated in Opinion No. 290-A that it "did
not rely on this rationale but merely observed that CIG might be able to
compete for more business." Opinion No. 290-A, at 61,278 (emphasis added).

28

We do not find CIG's argument on this point persuasive, nor will we set aside
FERC's judgment on the basis of factual arguments apparently raised for the
first time in this appeal. We find no basis on which to disagree with FERC's
balancing of the relevant interests and its ultimate conclusion that certain fixed
costs should not be recovered, through a minimum bill or otherwise. It is
apparent that FERC is spurring CIG to become more competitive in its
marketing of natural gas rather than sit back, do nothing and still be assured of
recovering costs and achieving profits. Thus, we hold the Commission's
rejection of the first Seaboard factor was neither arbitrary nor capricious.

B. Protecting full requirements customers.

29
30

Similarly, we find reasonable FERC's arguments for rejecting the second

Seaboard justification--that the minimum bill is necessary to protect CIG's fullrequirements customers from bearing a disproportionate share of fixed costs.16
FERC did not deny that CIG itself or some of its other customers might bear
the burden of paying fixed costs not paid by NGPL. It concluded, however, that
"the benefits to ratepayers of placing [CIG] at risk for [certain] costs here
involved outweigh the potential detriment of shifting those costs to full
requirements customers." 41 FERC at 61,466 (citing Transcontinental Gas, 40
FERC p 61,188, at 61,590.) CIG claims FERC's reasoning "completely
dismisses this second criterion."

31

In its brief FERC offers the following explanation for its conclusion regarding
Seaboard factor 2. The "benefits to ratepayers" to which its opinion refers,
FERC asserts, "are well known to CIG and other members of the natural gas
community that participated in the Commission's Order No. 380 rulemaking
proceeding [eliminating recovery of variable costs from minimum bills]."
FERC cites, without listing, "several benefits" identified by the D.C. Circuit in
reviewing that order (citing Wisconsin Gas, 770 F.2d at 1161). The "most
significant" of these benefits is "lower prices for all customers resulting from
the increased incentive to compete vigorously in an environment where
minimum bills do not maintain gas prices at artificially high levels."17 As for
the "costs" of eliminating the minimum bill, FERC also adopted the Wisconsin
Gas court's finding that the harm, if any, to full requirements customers "would
be isolated, of short duration, and outweighed by the overall long-term benefits
to these customers."

32

FERC's brief makes clear what its challenged orders do not--that FERC views
the costs and benefits of eliminating the minimum bill "from a 'national
perspective' " (quoting 770 F.2d at 1161). This was also the view FERC
adopted in its rulemaking eliminating recovery of variable costs in all minimum
bills, an approach affirmed by the D.C. Circuit in Wisconsin Gas. Since then
the D.C. Circuit has affirmed FERC's reliance on this balancing test in
eliminating a company's minimum bill altogether. East Tennessee, 863 F.2d at
940. See In re Atlantic Seaboard Corp., 404 F.2d at 1274 ("task of determining
what interests should be protected, and to what extent, is a policy matter for the
agency"). We also find it a reasonable approach.

33

In order to overcome the foregoing considerations, FERC requires a pipeline to

"produce evidence to show that excessive cost-shifting would occur on its
system in the absence of a minimum bill." Tennessee Gas, 871 F.2d at 1105.
FERC and the D.C. Circuit interpret this requirement to mean "concrete
evidence" not simply speculation. Id. Here FERC stated CIG "must offer more
than broad generalities and vague possibilities of economic calamities" that
might result in the absence of a minimum bill, and that "CIG must specifically
demonstrate that particular full requirements customers are likely to bear higher
overall rates as a result of the minimum bill's elimination" (citing Mississippi
River Transmission Corp. v. FERC, 759 F.2d 945, 955 (D.C.Cir.1985)).

34

This approach to the second Seaboard justification, approved by the D.C.

Circuit, has been described in more detail by FERC in at least two prior cases.
In Tennessee Gas Pipeline Co. and Transwestern Pipeline Co., FERC made
clear it will not

35
approve
a minimum bill simply because there exists the slightest possibility that
some costs will be shifted to full requirements customers.... To balance these
conflicting interests the initial questions that must be answered are: Will the full
requirements customers be affected ...? If so, by how much? These questions are
intensely factual. They turn on the resolution of such subsidiary questions as: Will
the partial requirements customer in fact reduce its purchases? If so, by how much?
Will the reduction be short-term or long-term? Will the pipeline reduce its costs to
compete for the partial requirements customer? And, will the pipeline increase sales
to other customers be they existing or new?
36

Tennessee Gas, 871 F.2d at 1105 (quoting 40 FERC p 61,140, at 61,437), and
(36 FERC p 61,175, at 61,145).

37

FERC concluded here and we agree that "CIG simply has not demonstrated any
shifting of costs with sufficient specificity to warrant the retention of its
minimum bill." Thus, FERC reasonably rejected the second Seaboard
justification.18

C. Protecting customers from take-or-pay liabilities.

38
39

Finally, FERC concluded the minimum bill does not serve as a means of
minimizing take-or-pay costs--the third Seaboard justification.19 Here, too,
FERC held CIG's evidence insufficient to make the required showing. It found
that "CIG ... has shown no specific connection between its minimum bill and its
take-or-pay obligations." Opinion No. 290, 41 FERC at 61,466. Specifically,
FERC noted that "CIG has not referred to any record evidence that [NGPL's]
cutbacks caused or will cause particular minimum bill or take-or-pay
obligations to be incurred [by CIG]." Opinion No. 290-A, 43 FERC at 61,278.20

40

Requiring a specific connection is consistent with FERC's approach affirmed in

other cases. For example, Tennessee Gas held that a minimum bill can be
justified under this factor "if it links cost-incurrence with cost-causation, i.e., if
it assists in collecting take-or-pay costs from those customers that have caused
the costs by reducing their purchases." 871 F.2d at

41 21 While CIG alleged such a connection, it offered no evidence in support

1105.
thereof. Indeed, it may have been unable to make such a demonstration, given that
CIG's sales to customers other than NGPL apparently also had declined in recent
years.
42

CIG calls FERC's assertions on this issue "cavalier" and "disingenuous in light
of the facts." Yet the "facts" relied on by CIG are remarkably skimpy. For

example, CIG claims it purchases gas under firm take-or-pay contracts in order
to meet NGPL's demand. But CIG's only citation to the record in support of this
claim is incomplete and misleading. Testimony immediately following the
statement to which CIG refers states that CIG does not necessarily incur takeor-pay liability "to the extent it is unable to sell gas to [NGPL]." And CIG cites
no facts to bolster its argument that the CIG minimum bill, "[b]y providing an
economic incentive to NGPL to buy from CIG, ... allows [CIG] to avoid takeor-pay deficiencies." (Emphasis in original). Indeed, CIG disregards the glaring
inconsistency between this allegation and its repeated emphasis on NGPL's
failure to buy CIG's gas in favor of more costly supplies.
43

The Commission also points out that CIG has not quantified any take-or-pay
costs it has incurred allegedly because of NGPL's failure to buy gas. FERC
further argues that elimination of a minimum bill "does not invariably lead to
increased pipeline take-or-pay costs," noting that CIG's minimum bill contains
a crediting provision like the one in Wisconsin Gas, which allowed penalty
payments to be credited to subsequent gas purchases. See 770 F.2d at 1160.
CIG has responded to neither of these arguments.

44

Accordingly, the Commission determined and we agree that CIG has not
adequately demonstrated its minimum bill was necessary to enable CIG to
collect its take-or-pay costs. Allegations and arguments claiming necessity to
protect customers from take-or-pay liabilities are not sufficient. Having failed to
satisfy any of the three Seaboard justifications for retaining a minimum bill,
FERC properly concluded the bill was unjust and unreasonable and should be
eliminated.

II. Transportation Rates

45

The second issue on appeal is FERC's rejection of CIG's requested

transportation rate change. CIG proposed to increase its on-system ("EUS-1"),
or sales displacement, rate from 36cents to approximately 60.95cents per
million cubic feet (Mcf). It also proposed an off-system ("EUS-2") rate of
30.63cents per Mcf. CIG argues FERC erred in rejecting its proposal and in
establishing the same rate for on- and off-system transportation,22 but that even
if FERC's rate design is upheld, it should not be applied to certain certificated
transactions.

46

CIG argues the increased on-system rate is needed to pay the costs it fails to
recover when it merely transports gas to its on-system market, versus when it
makes a gas sale. Transporting gas on-system displaces its own sales, CIG
asserts; thus the pipeline suffers an "economic penalty" if the transportation

rate does not recover the same costs that a sale would recover. CIG's proposed
on-system rate was designed to "recover [CIG's] fully allocated sales
commodity rate." According to CIG, off-system transportation incurs lower
costs, and it "represents new, incremental business that will absorb a share of
systemwide costs and benefit all other customers."23
47

CIG claims the evidence submitted by CIG and the Commission staff "fully
supported the very obvious class of service and cost distinction between 'offsystem' transportation business which is truly 'incremental,' and transportation
to on-system markets historically served by CIG (i.e., 'sales displacement'
transportation)." Furthermore, it claims "[t]here was no evidence submitted in
opposition to this rate design." CIG bears the burden of proving the
reasonableness of its proposed rate increase. But CIG has directed us to no
evidence that "fully supports" the rate differential, and we have discovered
none.24

48

The ALJ concluded that on- and off-system service "appear[ ] to be

comparable." According to FERC and CIG, the ALJ consequently required that
the rate charged for on-system service equal that charged for off-system
transportation, thus lowering the on-system rate from 36cents to 31cents.
However, we can find no indication in the ALJ's decision nor in FERC Opinion
No. 290 or 290-A that FERC affirmatively lowered the rate for on-system
transportation below its level prior to CIG's proposed rate increase (i.e.,
36cents). Moreover, arguments presented by intervenor Big Horn Fractionation
Co. (Big Horn), upon which the ALJ relied heavily, urged only that the onsystem rate be returned to the prior 36cents level.25

49

The ALJ devoted one-and-a-half pages of an eighty-page opinion to the

transportation rate issue. 35 FERC p 63,043, at 6767-68. FERC summarily
affirmed the ALJ's decision in Opinion No. 290, 41 FERC at 61,454; upon
CIG's request for rehearing, it allotted one page of discussion to the issue in
Opinion No. 290-A, 43 FERC at 61,272-73. CIG faults FERC for affirming the
ALJ's decision on this issue "without discussion of the true cost incurrence and
cost responsibility difference." The pipeline concludes the ALJ and FERC
orders are "completely unsupported and arbitrary and capricious."

50

In the hearing before the ALJ, CIG and the FERC staff apparently agreed that
the on-system transportation rate should "equal the non-gas component of the
sales rate ... in order to allow CIG to be economically indifferent as to whether
it sells or transports gas." Thus, the FERC staff initially favored CIG's proposed
rate increase; however, it subsequently reversed its position and now supports
the ALJ's decision.

51

The ALJ concluded that the proposed rate "has not been shown to be just and
reasonable particularly, in light of the continuation of the much lower rate for
what appears to be comparable service under [the off-system rate]." The ALJ
relied heavily on arguments made by Big Horn (predecessor of Western Gas
Processors, Ltd.), an intervenor in the rate proceeding. Big Horn argued that
CIG had not adequately justified the requested rate change and that it should be
required to refile a rate that would recover only CIG's transmission costs. The
ALJ found Big Horn's position had merit and rejected the proposed increase.

52

As the proponent of the rate change, CIG bears the burden of demonstrating
that it is just and reasonable. But CIG's arguments are based largely on
conjecture and appear flawed as a matter of logic. As Big Horn argued to the
ALJ, "[i]t seems incredible ... that [CIG] would burden interruptible ... service
[customers] with the fixed costs for production, gathering, and storage as per
the ... sales rate (for firm service)." And FERC points out that CIG makes
inconsistent arguments with respect to transportation rates. In a portion of its
rate case not appealed here, it urged that storage costs should not be included in
transportation rates, yet it makes the opposite argument here.

53

In contrast to CIG's presentation on this issue, Big Horn offered extensive

arguments opposing the change. The ALJ was persuaded by those arguments,
and FERC concurred. We must agree that CIG has not borne its burden of
persuasion on this issue.

54

We hold only that CIG has not demonstrated that its proposed 60.95cents rate
for on-system transportation is reasonable; thus, we affirm FERC's rejection of
the rate increase. Despite FERC's and CIG's contrary interpretations in their
briefs, we do not read the ALJ's decision or either of FERC's orders as
establishing an on-system transportation rate of 30.63cents, the rate CIG
proposed for off-system service. The ALJ found only that the two classes of
service were "comparable," not that they were "equal."26 No party to the FERC
proceeding argued that the rates for the two types of service should be equal,
nor did any party object to CIG's proposed off-system rate. In the absence of
any evidentiary basis for reducing the on-system rate below the prior
systemwide level of 36cents, we construe FERC's orders as rejecting the onsystem rate increase, restoring the 36cents systemwide transportation rate, and
ordering appropriate refunds.27 If FERC wishes to reduce this rate to the EUS-2
level (30.95cents), it may do so only according to the procedures specified in
15 U.S.C. Sec. 717d and regulations promulgated thereunder.

55

Lastly, CIG claims that, even if FERC's rate design is upheld, it should not be
applied to certain transactions for which FERC has issued certificates of "public

convenience and necessity." 15 U.S.C. Sec. 717f. FERC terms this "an
impermissible collateral challenge to Commission-issued certificates that never
were appealed and now are final." The certificates, each of which included a
"fully compensatory, cost recouping, sales displacement rate, such as the EUS1 Rate (i.e., 61cents/Mcf)," were issued "subject to the outcome" of this rate
proceeding. CIG states that the specific transactions covered by these
certificates "were not even subject to Rate Schedule EUS-1, and that the rate
provided in that rate schedule was merely referenced by CIG and the
Commission as a 'shorthand' for a fully compensatory, sales displacement,
transportation rate."
56

FERC argues that the "subject to the outcome" condition, which was included
in each of the certificates, requires that the on-system rate ultimately found to
be just and reasonable in this case becomes the rate applicable to each
certificate. Upon CIG's request for rehearing of FERC's EUS-1 decision, FERC
held that this rate proceeding "is not the appropriate forum to discuss the effects
of the conclusions with respect to the EUS-1 rate on other issues [i.e., the
certificates] in other dockets." Opinion No. 290-A, 43 FERC p 61,089, at
61,273 n. 7. In responding to the issue now raised by CIG, FERC declares:
"This Court's analysis therefore comes to an end once it affirms the decision of
the Commission to lower CIG's EUS-1 on-system transportation rate."

57

Neither party has provided us with copies of these certificates; thus we are
unable to review the precise language of the disputed condition. Moreover, CIG
did not even identify to FERC the specific certificates that warranted rehearing.
Opinion No. 290-A, 43 FERC p 61,089, at 61,273 n. 7. Although it appears that
CIG has now identified those certificates, we will not review them or the
related proceedings de novo. Therefore, we cannot say that FERC's
determination that "CIG should raise those issues in the relevant certificate
proceedings" is unreasonable.

58

AFFIRMED.

The Honorable Howard C. Bratton, Senior Judge, United States District Court
for the District of New Mexico, sitting by designation

Three other issues asserted in CIG's Opening Brief have been mooted by
subsequent developments and were relinquished by CIG prior to oral argument
in the case

This opinion deals with one of four petitions for review of these FERC orders

which were filed in this court. An opinion in Natural Gas Pipeline Co. of
America v. FERC, 904 F.2d 1469 (10th Cir.1990), is also being filed today.
Two other suits, Nos. 88-2191 and 88-2784, were dismissed by the parties prior
to argument
3

CIG's (and most pipelines') sales rates consist of two parts: A demand charge,
which recovers a portion of fixed costs, is paid on all contracted volumes,
regardless of the amount of gas actually purchased. The commodity charge,
which covers remaining costs and all variable costs, is paid only for volumes of
gas actually sold. Variable costs consist principally of the cost of the gas itself,
while fixed costs (at issue in this case) include production and gathering costs
and the return on equity and certain associated taxes. FERC ruled in 1984 in
Opinion No. 380 that the collection of variable costs through minimum bills is
not just and reasonable
The contract in issue here originally required NGPL to pay the full contract
price for 90% of its entitlement, but after Opinion No. 380 was issued, FERC
modified the minimum bill provision to eliminate the recovery of all variable
costs. This court reviewed FERC's modification of CIG's minimum bill in
Colorado Interstate Gas Co. v. FERC, 791 F.2d 803 (10th Cir.1986), cert.
denied, 479 U.S. 1043, 107 S.Ct. 907, 93 L.Ed.2d 857 (1987). In this case CIG
objects to FERC's attempt to eliminate the minimum bill altogether and to limit
the fixed costs otherwise recoverable by CIG.

Retention of a minimum bill is appropriate, even if it has anticompetitive

effects, if it meets any one of three factors (the Seaboard factors) that have been
identified by the Commission:
[A] minimum bill may be justified as a means of protecting the pipeline against
the risk of not recovering the fixed costs in the commodity component[,] ... a
means of protecting full requirements customers from bearing a
disproportionate share of the fixed costs resulting from swings off the system
by partial requirements customers[, a]nd ... as a means of protecting customers
from take-or-pay liabilities the pipeline might otherwise incur.

41

FERC p 61,179, at 61,476 (quoting Seaboard factors as discussed in FERC

opinion in Transwestern Pipeline Co., 32 FERC p 61,009, at 61,031 (1985),
aff'd, 820 F.2d 733 (5th Cir.1987)). The D.C. Circuit has interpreted In re
Atlantic Seaboard Corp. to provide that a minimum bill "may be justified if
'specifically designed to achieve [one of the stated remedial ends], but nothing
more.' " Panhandle Eastern Pipeline Co. v. FERC, 881 F.2d 1101, 1113
(D.C.Cir.1989) (quoting Mississippi River Transmission Corp. v. FERC, 759
F.2d 945, 950 (D.C.Cir.1985))

Kansas Gas cites NLRB v. Bell Aerospace Co., 416 U.S. 267, 290-95, 94 S.Ct.
1757, 1769-72, 40 L.Ed.2d 134 (1974), and FPC v. Texaco, Inc., 377 U.S. 33,
84 S.Ct. 1105, 12 L.Ed.2d 112 (1964), for the familiar principles that "an
agency may articulate its general policy in a particular proceeding ... rather than
in a rulemaking," and that an agency "may apply its reasoned analysis of an
issue to guide its disposition of individual cases." 758 F.2d at 719

The D.C. Circuit reached a similar conclusion in East Tennessee when it stated
that "testimony about the effects of the full-cost minimum bill constitutes
substantial evidence supporting the Commission's prediction that the fixed-cost
minimum bill will also produce anticompetitive results." 863 F.2d at 938
(emphasis in original)

FERC's determination in Transcontinental Gas that "a traditional fixed cost

minimum bill usually restrains competition and is presumptively unjust and
unreasonable," 40 FERC p 61,188, at 61,590 (1987) (Opinion No. 260-A), was
based on three factors it considered "common to every case given the current
market": First, that gas supplies currently exceed demand; second, that where
supplies exceed demand, a "minimum bill by its very nature forecloses
competition"; and third, the likely effect of a minimum bill is to "make it
'uneconomic to purchase on a least cost basis.' " Id. at 61,589-90 (citation
omitted). FERC explicitly or implicitly subscribes to these factors in this case

CIG asserts that "allowing NGPL to keep its competitor (CIG) obligated to
maintain sales service to it" when NGPL intends to purchase no gas is itself
anticompetitive and should have been considered by the Commission

We note, however, this claim more appropriately fits under CIG's second line of
reasoning, which argues that the minimum bill, even if anticompetitive, is
necessary. Indeed CIG raises the claim again in its discussion of the second
Seaboard factor

10

Since Wisconsin Gas the D.C. Circuit also has affirmed FERC decisions to
eliminate a company's minimum bill altogether. E.g., Tennessee Gas Pipeline
Co. v. FERC, 871 F.2d 1099 (D.C.Cir.1989); East Tennessee; cf. Trunkline
Gas Co. v. FERC, 880 F.2d 546 (D.C.Cir.1989). In Trunkline Gas, it held that
"a pipeline with an MFV rate design [does] not require a minimum bill to avoid
such disproportion [between full and partial requirements customers]." Id. at
550 (citing East Tennessee, 863 F.2d at 940)

11

On cross-examination, an NGPL witness stated: "I don't necessarily agree with

you that it is correct to say that $3.21 [per Mbtu] is higher than $3.25 [sic] ...
because I think there are other considerations that have to be taken into
account."

12

See factors listed in note 4 supra

13

The Commission also claims that under the modified fixed-variable (MFV) rate
design (which FERC, as a result of this rate-making proceeding, ordered CIG to
adopt), "a minimum bill to assure recovery of fixed costs is unnecessary."
Opinion No. 290, 41 FERC p 61,178 at 61,466. What the Commission
apparently means by this is that the demand charge, which NGPL pays under
the MFV rate system, contains those fixed costs that FERC has determined are
properly recoverable. The recovery of other fixed costs (e.g., return on equity)
should not be guaranteed; thus, a minimum bill is "not necessary."

14

Transwestern Pipeline reached a similar conclusion, and the circuit and FERC
in that case explained their reasoning somewhat more thoroughly. The court
stated:
[T]he Commission based its finding on the anti-competitive impact of
Transwestern's fixed-cost minimum bills on a prediction of how those
minimum bills would operate in the future in markets served by Transwestern.
The Commission based this prediction on evidence in the record, its knowledge
of the industry, and common sense. Specifically, the Commission identified
three factors. First, gas supplies ... in the [relevant markets] had exceeded
demand for the past few years, and the oversupply was likely to continue.
Second, the Commission analogized this situation to the treatment of
requirements contracts under antitrust law. Where supply exceeds demand, a
requirements contract by its very nature forecloses competition.... Third, the
Commission observed that a fixed-cost minimum bill would continue to compel
a customer to buy gas from Transwestern rather than from a lower-cost
competitor.
820 F.2d at 740.
CIG argues Transwestern is not applicable here because it is not necessary to
predict the impact of CIG's minimum bill; it is apparent from NGPL's recent
practice of purchasing higher priced gas from other companies that the
minimum bill does not have anticompetitive effects.
We have already confessed to being puzzled by NGPL's purchasing practices,
but noted testimony by NGPL suggesting other factors besides price motivate a
gas company's choice of supplier. See supra text at 1462. We will not speculate
as to the reasons for NGPL's purchasing decisions or the likelihood of its future
purchasing patterns. We can safely assume, however, that FERC's "common
sense" and "knowledge of the industry," 820 F.2d at 740, do not vary from case
to case with respect to the same ratemaking issue. These are persuasive factors

here as they were in Transwestern.

15

FERC claims that none of the factual assumptions underlying CIG's claim that
it would not be able to compete effectively for other gas sales is supported by
record evidence

16

FERC noted that, in CIG's rehearing request, "CIG did not specifically claim ...
that its minimum bill is needed to protect full requirements customers from
bearing a disproportionate share of the fixed costs." Opinion No. 290-A, 43
FERC p 61,089, at 61,278 n. 33. CIG has raised the issue here, however

17

FERC states in its brief that "the Commission identified an additional benefit-the increased ability of CIG to compete for transportation service in an effort to
recoup lost sales revenue" (citing 41 FERC at 61,466). It is not clear to us,
however, whether FERC construed this as a "benefit" of eliminating the
minimum bill, or merely an additional mechanism CIG could employ in
attempting to offset its lost income

18

The petitioner in Tennessee Gas Pipeline Co., in arguing that its minimum bills
satisfied the second Seaboard test, claimed that its partial requirements
customers had reduced their purchases to substantially less than their
entitlements. The D.C. Circuit rejected this evidence as "not probative under the
second justification since it relates to drops in volume experienced while
Tennessee had a minimum bill in place; it therefore indicates nothing about
how elimination of the bill would itself cause a drop." 871 F.2d at 1105 n. 8.
We reject CIG's attempt to use evidence concerning NGPL's reduced purchases
in the same way here

19

FERC explains that most interstate pipelines enter into contracts with producers
whereby they agree to pay for a minimum volume of gas, even if not actually
taken. If a pipeline's own sales decrease, it can "find itself unable to take
enough gas from its supplier to meet its contractual take-or-pay obligations."

20

FERC notes in footnote 35 of Opinion No. 290-A that CIG's minimum bill is
not designed solely to remedy its take-or-pay problem, as required to satisfy the
third Seaboard test. The D.C. Circuit has interpreted In re Atlantic Seaboard
Corp. to provide that a minimum bill "may be justified if 'specifically designed
to achieve [one of the stated remedial ends], but nothing more.' " Panhandle
Eastern Pipeline Co. v. FERC, 881 F.2d 1101, 1113 (D.C.Cir.1989) (quoting
Mississippi River Transmission Corp. v. FERC, 759 F.2d 945, 950
(D.C.Cir.1985))

21

The D.C. Circuit in Tennessee Gas recognized the pipeline company's "not ...
insubstantial" concern about the general need for a minimum bill in its rate

structure in light of its own take-or-pay liabilities, and noted FERC's "
'insouciance on take-or-pay.' " 871 F.2d at 1106 (quoting 824 F.2d at 1044).
The court admitted to being "concern[ed] about FERC's unwillingness to meet
the take-or-pay challenge head-on ...," but was "relieved by [FERC's] actions
[relevant to take-or-pay] in other proceedings." Id. Interestingly, the court
concluded that as a result of those proceedings, particularly FERC's Order No.
500, 52 Fed.Reg. 30,334 (1987), the third Seaboard factor probably "will retain
little vitality in the future." 871 F.2d at 1106. The Fifth Circuit recently has
gone even farther, calling minimum bills "unsalvageable by the In re Atlantic
Seaboard factors when the MFV design is used." Texas Eastern Transmission
Corp. v. FERC, 893 F.2d 767 (5th Cir.1990)
FERC's interim rule in Order No. 500 was vacated and remanded by American
Gas Ass'n v. FERC, 888 F.2d 136 (D.C.Cir.1989). Pursuant to the court's
judgment, FERC promulgated a final rule on Dec. 21, 1989. 54 Fed.Reg.
52,344. The final rule continued the take-or-pay crediting regulations adopted
in Order No. 500, with two modifications. Id. Several producers and pipeline
operators filed petitions for review of the Commission's revised order, and the
D.C. Circuit again vacated and remanded in Associated Gas Distributors v.
FERC, 893 F.2d 349 (D.C.Cir.1989).
22

There is some confusion as to what FERC actually did--set one rate applicable
to both types of service, or simply reject the proposed increase for on-system
service. We conclude it did the latter. See our discussion in the text infra

23

FERC points out that much of CIG's presentation in favor of the rate increase is
made "belatedly"--in its brief on appeal, rather than before the ALJ

24

Counsel for an intervenor in the FERC proceeding asked a witness for the
FERC staff where in the record "anyone interested in trying to understand the
rate increase" would look. The FERC staffer admitted it was "a valid question,"
but stated "it's a little bit difficult," and ultimately could point to no record
evidence. He suggested that explanations relevant to the rate increase were in a
portion of CIG's filings that FERC had rejected

25

Later, however, Big Horn's successor, Western Gas Processors, Ltd., stated that
the ALJ and the Commission "concluded that under the non-discrimination
requirement of Section 4 of the [Natural Gas Act], the two rates had to be
equal." According to Western Gas, FERC thus ordered CIG to charge 31cents
for all transportation service. As discussed in the text, we do not reach the same
conclusions
We also note that this case involved other transportation rate issues that were
not appealed to this court. In one instance the ALJ approved the inclusion of

storage costs in a transportation rate; in another, he disallowed such costs. This

would seem to refute Western's assertion that the "non-discrimination"
provision "requires" that rates be equal.
26

The ALJ stated simply that the "increase in the EUS-1 rate from 36 cents to
60.95 cents ... has not been shown to be just and reasonable particularly, in light
of the continuation of the much lower rate for what appears to be comparable
service under EUS-2."

27

CIG's EUS-1 and EUS-2 rates went into effect subject to refund (i.e., subject to
FERC's eventual determination as to the rates' reasonableness) on September
28, 1985. Accordingly, pursuant to our disposition of this appeal, CIG must
make refunds based on the on-system transportation rate of 36cents for the
period during which the 60.95cents rate was in effect. See FERC Opinion No.
290-A, 43 FERC at 61,273